G20 summit masks US-EU tensions on economic recovery

The G8 and G20 summits may have seemed a damp squib, but the final communiqué, always drafted so that everybody can go away saying that they’ve won, only masks the fundamentally different approaches to economic policy by the US and by European countries.

The G8 and G20 summits may have seemed a damp squib, but the final communiqué, always drafted so that everybody can go away saying that they’ve won, only masks the fundamentally different approaches to economic policy by the US and by European countries.

Communiqués mean different things to different people. When President Obama welcomes the commitment to halving budget deficits by 2013 and says that “we can’t all rush to the exits at the same time”, he is saying ‘don’t remove stimulus measures too quickly’. For George Osborne, Wolfgang Schaeuble and others it means ‘slash and burn’.

Some countries, like Greece, Spain, Portugal and Italy do have to make deep cuts and structural labour market reforms if they are to avoid economic meltdown, but these are exceptional cases; Germany, France and Britain are not facing such dire problems, yet have chosen to swallow the same medicine as their Mediterranean counterparts.

This is entirely unnecessary – the average budget deficit in the Eurozone is 6 per cent – far from ideal – but hardly as apocalyptic as the credit rating agencies would have you believe. It is a fine balancing act, when to invest to make up for weak private demand and when to consolidate to balance the books – but Europe is in grave danger of becoming to this decade what Japan was to the 1990s.

During the 1970s and 1980s, Japan was seen by eminent economists, most notably Paul Kennedy, as the new world economic powerhouse that would soon overtake the US. Yet, recession followed by too little stimulus – withdrawn too early – led to more than a decade of anaemic growth and, even now,  a debt to GDP ratio of around 200 per cent – more than treble that of Britain.

Yet every country in Europe is taking the approach that public spending cuts and higher taxes will lead to more controlled consumer spending and a smaller public sector, while investment and exports will be the main drivers of growth.

US Treasury Secretary Tim Geithner was candid that the US, which, at a predicted 3.1 per cent for 2010, has much stronger growth than the eurozone but an 11 per cent budget deficit like Britain, is not in a position to pick up the slack. European countries will not be able to rely on the US to buy their goods. At the same time, through simultaneous moves to economic consolidation and to weaken consumption, they are killing stone dead demand for exports within the eurozone.

The bottom line is that steady growth is needed in order for budgets to be balanced, and the idea that premature cuts will deliver sustainable public finances is a fallacy; failing to recognise that a collective rush to austerity will lead to higher deficits, higher unemployment and stagnant output will haunt Europe’s leaders.

10 Responses to “G20 summit masks US-EU tensions on economic recovery”

  1. Left Foot Forward

    G20 summit masks US-EU tensions on economic recovery: //bit.ly/bpzRGw

  2. paulstpancras

    RT @leftfootfwd: G20 summit masks US-EU tensions on economic recovery: //bit.ly/bpzRGw

  3. Hitchin England

    G20 summit masks US-EU tensions on economic recovery: //bit.ly/bpzRGw via @leftfootfwd

  4. Anon E Mouse

    Ben Fox – Although a well written article it is still nothing more than a speculative work of fiction from yourself (again).

    There is simply no US-EU tension that anyone, obviously you excepted, can see. On the UK (now on the same economic steps to recovery as the EU – Gordon Brown got that one wrong as well) the US President says:

    “We have long-term debts that have to be dealt with. There are going to be differentiated responses between the two countries because of our different positions but we are aiming at the same direction, which is long-term sustainable growth that enables people to work.”

    And the UK leader says:

    “We are aiming at the same target, which is world growth and stability, but those countries with big deficits like ours have to take action in order to keep that level of confidence in the economy which is absolutely vital for growth.”

    Please explain where you see any tension in those statements.

    The fact is the US is a more different economy to those in the EU so the response to the respective deficits will be different but that doesn’t mean there will be any “tension” between the countries, simply different responses to the same situation.

    So what is it that you know Ben Fox that the rest of the world doesn’t?

    (Where’s my £50 btw – you know what I mean…)

  5. Mr. Sensible

    #This rather reenforces why the government are wrong.

    I’ve heard a bit about what happened in Japan, but that figure is just striking.

    In Britain, I would be interested to know how putting 1.3 million more out of work is going to cut the deficit?

  6. Car_Share

    We can all pretend to be acting as one when it comes to turning around the World’s economy but we are in fact acting for our own interests first. The US are as guilty as the EU of this.

  7. mike

    hay what a million people extra on the dole

    a price well worth paying

    so just how many Tory Mps partners will lose thier jobs as teachers, nurses, police, prison officers none

    because they all work in wealth creation

    Caring is for whimps

  8. Anon E Mouse

    Mr.Sensible – You are deliberately misusing the figures. It’s basic maths. If 1.3 million lose their jobs and 2.5 million get new jobs then the job increases are 1.2 million extra jobs…

    By the way the paper you quote from shows under the last useless government’s plans there would have been 70 thousand more job losses.

    mike – Remember: We are all in this together…

  9. Mr. Sensible

    Mr Mouse, the Chartered Institute for personele and development have said there’s not ‘a cat in Hell’s chance’ of 2.5 million extra private sector jobs.

    ‘We’re all in this together.’

    But it is clear from the studies that have been done in to this budget that we are not.

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